Legendary fund manager Peter Lynch once said to buy a business that any idiot can run – because sooner or later an idiot probably will. His point was simple. A great business is self-sustaining and performs well in a variety of different operating environments. It doesn’t need a charismatic and visionary leader to continue to perform well.

WiseTech WTC investors have been pondering which category the company falls in over the last few weeks. Is this a company that needs a visionary founder to run it? Or will anybody do. Investors don’t seem so sure about the answer as the shares have fallen over 15% in the last month in the wake of truly shocking allegations about founder Richard White.

A good place to start is the view of our equity analyst Roy Van Keulen on White:

“We see key person risk. WiseTech has been managed exceptionally well by its founder and former CEO Richard White, who still owns around a third of the company and who has been transitioned to a consultant role following allegations of inappropriate behavior. White was instrumental in developing and executing the WiseTech vision of becoming the operating system for the logistics industry. We expect White will continue to drive the CargoWise product vision and strategy in his new role, but we see risks around his continued engagement with the company.”

Van Keulen is illuding to the strange arrangement that WiseTech has apparently settled upon. Given the allegations White was deemed unfit to be CEO and the investigation by the company continues. One would think that the results of the investigation would influence the role he plays in the company going forward but for now he is in a consulting role where he will “focus on product and business growth, to create even greater value for shareholders.”

I spent 10 years as a consultant. Not many people listened to me. Of course I didn’t own 30 percent of any company I consulted for. None of us knows what will happen with WiseTech. All I can say for sure is that I wouldn’t want to be the next CEO. Given what is sure to be a strange dynamic where a consultant is the majority shareholder I think investors should at least contemplate that the CEO candidate pool may be limited.

I’ve put together a checklist for a company that any idiot can run. In this case I’ve put WiseTech through the paces but you can also do this for any company that you own or are contemplating buying.

To me this checklist is about more than just the CEO. A company that any idiot can run is also a company any idiot can own. That is a company that I want in my portfolio. This isn’t a reflection on my own debilitating lack of self-esteem. It is a desire to make things easy on myself. I don’t want to worry about shares in my portfolio. I want them to perform well in any situation.

A moat

As investors we want to own companies with a competitive advantage over rivals. The impact of competition can be ruinous for a company. Competing means constantly spending on product innovation, costly marketing efforts, and lower prices. No thanks.

Temporary competitive advantages like the benefit from being the first mover hold little appeal. To be truly valuable the competitive advantage needs to be sustainable. Owning companies with moats allows me to sleep at night and not worry about who is running my company. Even a marginally competent CEO can’t screw that up.

WiseTech has a Narrow Economic Moat Rating which indicates our analyst believes the company has a competitive advantage that is sustainable for at least 10 years. This is attributed to high switching cost and network effects on the core CargoWise product suite. In not analyst speak this means that it is very difficult to switch providers and that the value of WiseTech’s offering grows as adoption increases.

Strong financial condition

Having some cash in the bank is helpful for both people and companies. The world is uncertain after all. Financial resources allow a company to survive downturns and take advantage of opportunities when competitors are hunkered down.

Debt reduces options and puts pressure on a company. During a challenging time a brilliant leader may be able to wiggle out of this debt trap. From an academic perspective this is an interesting experiment in leadership. When my money is at stake I don’t want to test the mettle of a leader in a perilous situation.

WiseTech rates highly in this measure with an Exemplary Capital Allocation rating. Specifically, our analyst cited a strong balance sheet and believes financial risk is low given high operating margins, net cash, and forecast positive cash flows.

The range of business outcomes

Companies and industries are different. In some industries there are a myriad of factors that influence how a company will perform. In some that are only a handful. The more factors that influence how a company does the harder it is to predict future outcomes and the harder it is to manage theyou mi company. Especially if the factors that influence demand for products and services and the cost to supply those products and services are outside of the control of the company.  

Our analyst gives WiseTech an Uncertainty Rating of High which reflects the range of possible outcomes for the business. This is actually the middle of road rating. The reason our analyst believes the company doesn’t warrant a lower rating is because “the logistics industry is still in the early stages of digitizing, which means there is still high uncertainty regarding the ultimate market opportunity for WiseTech’s current and future products, as well as the adoption rate of WiseTech’s offering within the market.”  

Expectations

The role expectations play in investment outcomes is the one lesson I wish I knew when I started investing. If a company exceeds expectations the results are positive. If a company falls short they aren’t.

The lesson for investors is clear. Absolute results don’t matter. Results in relation to expectations matter. If you can sum up success as a stock picker in a single line it would be to find shares where market expectations are not consistent with reality. If they are too low than buy the share. If they are too high avoid the share.

Logic dictates that lower expectations are easier to exceed. Expectations are reflected in the valuation of shares. If a share is trading at a high valuation the stakes are high. A brilliant leader will continually exceed high expectations like a pole vaulter who again and again clears the bar as it creeps higher. The combination of a not so brilliant leader – an idiot in Peter Lynch’s vernacular – and high expectations is a disaster waiting to happen. To paraphrase U2, an investor needs that situation like a fish needs a bicycle.

Even after the recent drop in the share price WiseTech isn’t cheap. It is currently trading in a range we consider to be fairly valued. Looking at relative valuation measures the price to earnings is at 147. That is higher than the market in general and the five-year average price to earnings of 89. My opinion is that expectations are still relatively high. Each investor can form their own opinion.  

Final thoughts

This is not intended to be an exhaustive list to evaluate a share. But it is worth thinking about what kind of company you are buying. Having this background can help you evaluate if a share is right for you – whether that is WiseTech or anything else you are considering.

Do you have a checklist for shares that you buy? I would love to hear what is on it. Email me at [email protected]

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